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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 02:31 PM   #61
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Re: Official ER Forum January Inflation Report

Mr Bunnyperson,

As an amused casual reader of this thread, I must say I totally agree with one of your assertions:

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Originally Posted by Cute Fuzzy Bunny
I guess I'm a weirdo.
Not that there's anything wrong with that of course...

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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 02:41 PM   #62
 
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Re: Official ER Forum January Inflation Report

TH,

You can worry about expense ratio's and actually do something about it. Not much you can do against inflation except hedge along with the CPI (which you don't believe in anyway).

So why worry about things you can't control? I think you need a hobby like Golf - Ala Jarhead
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 02:43 PM   #63
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by Cute Fuzzy Bunny
In short, I can pull up my budget and see what chunk is non-discretionary and what parts of it are rising. Electric, food, tv, internet, etc. I also periodically update my large/capital/periodic purchase plans with newer, usually higher figures to match revised assumptions.
I'd love to see your numbers, and those of any other OCD- Quicken-types who've collected such data -- in the proper demographic and geographic context.

I bet in your case, lifestyle changes (marriage, kid, etc) dominate your budget changes. Mine too. Not sure why anybody would want to factor that stuff out and look only at some single "inflation" number. Spending matters.

I use CPI-U as a macroeconomic indicator. GDP deflator is probably even better. I don't take them personally.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 03:05 PM   #64
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Re: Official ER Forum January Inflation Report

All I know is that whenever I go the grocery store these days I'm shocked at the cash register. Inflation is real over a number of years -- whether you are a percent above or below the national averages -- and you've got to take it into consideration in your financial planning. You can cut living expenses by lowering your standard of living of course, but that doesn't mean inflation isn't still there impacting you Not arguing with anyone's p.o.v. here -- no dog in this fight -- just saying inflation is real, not figmentary/personal/. Over decades it creeps up on you bigtime, even if you can dodge it for awhile or substitute away from it for awhile.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 03:10 PM   #65
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by ESRBob
All I know is that whenever I go the grocery store these days I'm shocked at the cash register. Inflation is real over a number of years -- whether you are a percent above or below the national averages -- and you've got to take it into consideration in your financial planning.
Agreed. So, what do you do about it? Increase your portfolio risk beyond your tolerance in the hope of higher returns a la Mr Bunny?
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 03:27 PM   #66
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Re: Official ER Forum January Inflation Report

Wab,
Not sure if this answers your questions, but the plan I use just builds in an average 3% inflation and the SWR added to that, plus .5% fees is below the historical return on the portfolio. Then the historical worst case testing with withdrawals in good and bad times shows that the portfolio still holds up, in real terms, over the longest periods. So I just kinda ignore it at the finest level and say, inflation will be there, I'm protected historically, so let your annual withdrawals define your spending parameters -- belt-tighten when required -- and don't worry about what the actual inflation rate is. Now if inflation started running 5% a year (in the economy) for a number of years, I'd be worried, unless my portfolio was still averaging the same real returns as during the 3% inflation environment.

Sgeee-- maybe engineers and artists are a lot closer than I thought! I see how both fields need a certain percent inspiration and a much bigger percent of disciplined cranking through things. That explains a lot -- except for the pocket protectors
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 03:31 PM   #67
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Re: Official ER Forum January Inflation Report

Bob - You can indeed dodge it a while, but theres a bottom to that. I shop at about the cheapest market that i'm going to walk into, rather than the fancy one I liked when I moved here. I quit buying filet mignon and rib eye steaks when the prices went to $16-20/lb. I raised my insurance deductibles. I started doing as much repair/replacement as I could do myself to avoid paying ridiculous prices to repair people and contractors.

So while I've been able to reduce my spending considerably since my working days, i'm pretty much at the bottom of it without reducing quality of life.

I want to know what effect inflation has on my spending over the term of my retirement so I can plan my investments accordingly.

If the average true early retiree doesnt know what inflations effect is on their spending, they may take on too much risk trying to offset something that isnt actually effecting them, or become too conservative and not create enough wealth to offset the increased cost.

C-T...perhaps if you can explain why you felt the need to analyze your spending to see that your personal rate of inflation was similar to the CPI-U? Did you feel that the exercise was wasted time? Would you have done anything differently with your spending or investing if you found that your PRI was lower or higher than you thought? Do you believe that because it was similar for you that its therefore similar for everyone? Do you think nobody should make an effort to do what you did? If so, why?

Wab - No quicken here, just a spreadsheet I take 15 minutes updating once a year. And i've already explained at least a half dozen times what I want to know and why. I also dont know where you're getting the "increase your risk tolerance" comment. I'm comfortable with my risk tolerance and my portfolio risk is probably a lot lower than most people. Seems you're more interested in arguing at this point than in helping people learn something.

As far as the CPI being an effective or accurate measure, lets just go to the horses mouth.

From the BLS CPI web site, frequently asked questions:

5. Does the CPI measure my experience with price change?

Not necessarily. It is important to understand that BLS bases the market baskets and pricing procedures for the U and W populations on the experience of the relevant average household, not on any specific family or individual. It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions.


According to data from the BLS over the last ~20 years a proposed CPI for retirees has grown about 15.31% more quickly than the CPI-W, which itself is somewhat higher than the CPI-U.

In general and on average, you'd be losing about 1% a year to inflation by using the CPI-U as a measuring stick.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 03:39 PM   #68
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Re: Official ER Forum January Inflation Report

Bunny, this is where I got your higher risk bit from:

Quote:
Originally Posted by Cute Fuzzy Bunny
My spending goes up, I either need to make more (higher return, higher risk portfolio), reduce my spending (basket substitute or elimination of non essentials) or make the conscious decision to consume more principal than I had previously considered.
I think it's one approach. Reducing your withdrawal rate is another approach. Trying to hedge with inflation-tracking investments is another approach. We all agree that complaining about inflation or worrying about inflation is fun, but not a good approach.

My approach is to hedge, watch, and adapt. So far, I'm in the clear. I'll keep you updated.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 03:55 PM   #69
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Re: Official ER Forum January Inflation Report

Hmm...so since you've decided to forgo knowledge of what your actual rate of inflation is having on your spending, how would you know how much to reduce your withdrawal rate? Or that you even needed to do so?

Are you in the clear because inflation during the entire term of your retirement has been fairly benign?

How effective are the inflation tracking investments as a hedge when most of them pay 1-2% over CPI-U, if the CPI for a retiree is 1% higher than the CPI-U...prospectively neutralizing the gain or at a minimum cutting it in half?

The vacillation between "not close enough" and "closer than I need" on varying topics of finance is something i'm still finding very, very interesting. Jumping money from one institution to another one for an extra .25%. Buying a bond because its paying .35% more this year than last year. But a possible full percentage off on a your real returns? Good enough. This is cracking me up.

This reminds me of a story about my aunt Mary. Mary was an awful driver. When she got to an intersection, she'd look rigidly ahead and keep going. Her theory was that if she didnt look left and right, other drivers would see her and note that she was a crazy old lady that wasnt looking, so they should stop and let her go.

Mary lived a full and enjoyable life and to the best of my knowledge gained greatly from her lack of concern about other oncoming vehicles and the stress relief of knowing that others were watching out for her.

Until the MBTA bus broadsided her at 25MPH and what was left of her car skidded into a pole. She wasnt much of a believer in seat belts either, not that it would have mattered.

(No sympathy needed...it was a long time ago and Mary wasnt that nice of a person)

So may I presume that if one feels that an activity is unworthy of performing for their own personal needs, that they can shut the **** up when people who do think its a worthwhile effort are discussing it?
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 04:03 PM   #70
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by Cute Fuzzy Bunny
Hmm...so since you've decided to forgo knowledge of what your actual rate of inflation is having on your spending, how would you know how much to reduce your withdrawal rate? Or that you even needed to do so?
My WR is well under 4%, so that tells me I have a safety cushion vs the worst-case historical scenario. That helps me sleep at night, and I recommend such a cushion to all. Prepare for worse-than-the-worst, and hope for something better.

Quote:
How effective are the inflation tracking investments as a hedge when most of them pay 1-2% over CPI-U, if the CPI for a retiree is 1% higher than the CPI-U...prospectively neutralizing the gain or at a minimum cutting it in half?
I don't consider TIPS a hedge against personal inflation. As I've stated a zillion times before in our variations of this chat, I consider them an alternative to nominal bonds, which have an embedded implicit inflation risk/estimate.

I've already described other investments that are inflation protected. To those, add real estate, commodities, etc. I recommend them as part of a bullet-proof portfolio.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 06:00 PM   #71
 
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by Cute Fuzzy Bunny
C-T...perhaps if you can explain why you felt the need to analyze your spending to see that your personal rate of inflation was similar to the CPI-U? Did you feel that the exercise was wasted time? Would you have done anything differently with your spending or investing if you found that your PRI was lower or higher than you thought? Do you believe that because it was similar for you that its therefore similar for everyone? Do you think nobody should make an effort to do what you did? If so, why?
Sure. No problem.

I actually believed that the CPI was understated by my anecdotel evidence. I decided that I needed some actual facts. After the exercise, I changed my mind and I now believe that the CPI is pretty damn close. I have hedged my investments accordingly. So it was not wasted time for myself at all! -

I think everyone should keep track of their spending and base their decisions on actual facts, rather than a knee-jerk reaction everytime they go to the grocery store.

Having an open mind is a trait of a good Democrat. - I try to base my decisions on facts instead of fantasy.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 07:21 PM   #72
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by ESRBob
. . . Sgeee-- maybe engineers and artists are a lot closer than I thought! I see how both fields need a certain percent inspiration and a much bigger percent of disciplined cranking through things. That explains a lot -- except for the pocket protectors
You mean artists engage in unprotected pocket insertions of their writing utensils? How uncivilized.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 07:26 PM   #73
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Re: Official ER Forum January Inflation Report

Sniff. Sniff.

I felt bad about beating a cute fuzzy bunny about the ears, so here's some data that actually backs his assertion.

BLS consumer expenditures report

This shows that consumer spending went up over 6%/year from 2003-2005.

CPI-U went up an average of 3.1% during those years.

This is not a statement about inflation, but it does say something about keeping up with the Joneses (you know, the ones with a negative savings rate).

So, I guess this means that only a 1% SWR is truly safe, and nobody should retire until they have 100X their expenses. Or something.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 07:36 PM   #74
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by wab
So, I guess this means that only a 1% SWR is truly safe, and nobody should retire until they have 100X their expenses. Or something.
I vote for the "or something".

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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 08:00 PM   #75
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Re: Official ER Forum January Inflation Report

I've studied a lot of the BLS reports about CPI-U calculations. The USBLS web site has enough information to keep an army of us busy reading for a long time. The CPI-U calculation is pretty imperfect. The average basket of goods may reflect the average person and come nowhere near reflecting any given individual's spending habits. Some regions of the country experience significantly more inflation than others. What is purchased by even the average household tends to change as technology changes. . . There is even a question of what exactly CPI should track -- the increased cost of specific goods or the increased cost of maintaining a relative lifestyle?

As I read the reports two things became apparent to me: 1) Calculating inflation in a meaningful way is a very difficult problem. Figuring out what to place in the basket, when to change the items in the basket and how to weight the various categories turns out to be harder than it first appers. 2) The people doing this at USBLS are doing about as good a job as I can imagine. They spend a lot of time thinking about the CPI calculation issues, collect a lot of data, perform a lot of analysis, and publish their methods and results for everyone to see. I've been impressed with the detailed analysis I've read.

I can't do anything about inflation. But at least my retirement planning approximates the impact inflation is going to have on me by using a number that reflects a lot of honest hours of investigation and anlysis. That approximation is far from perfect, but the error it introduces at this point in my retirement would appear to be less important than other aspects of my planning and spending. I don't know if my annual spending will continue to decline over time, but if it does, I won't be the only person who experiences this spending pattern.

http://www.fpanet.org/journal/articl...605-art7.cfm?&
Quote:
Reality Retirement Planning: A New Paradigm for an Old Science
by Ty Bernicke, CFP

Executive Summary
- Traditional retirement planning assumes that a household's expenditures will increase a certain amount each year throughout retirement. Yet data from the U.S. Bureau of Labor's Consumer Expenditure Survey show that household expenditures actually decline as retirees age. Consequently, under traditional retirement planning, consumers tend to oversave for retirement, underspend in their early years of retirement, or postpone retirement.
- "Reality" retirement planning assumes that a household's real spending will decrease incrementally throughout retirement. The result is that clients can make more realistic retirement saving assumptions and will be able to retire sooner.
- The paper analyzes the Consumer Expenditure Survey data to determine whether people are spending less voluntarily as they age or out of financial necessity or generational differences. The conclusion is that reduced spending is voluntary.
- Using Monte Carlo simulation, the paper runs hypothetical retirement income projections comparing traditional retirement planning and reality retirement planning. Under the traditional approach, the couple's nest egg would appear to be depleted by age 80. Under the reality approach, the nest egg at age 80 would be over $2 million.
- Such dramatic differences not only have implications for retirement planning, but for related issues such as estate, tax, and investment planning.
. . .
It's not that I don't care about inflation . . . I've actually devoted a fairly significant amount of time investigating it. But I think I understand it enough to know I'm not going to do a better job than USBLS without a monstrous amount of effort, if I did a better job I wouldn't know how to use it, and that it's not hurting my plans now.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 08:08 PM   #76
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Re: Official ER Forum January Inflation Report

All I've been saying from the top is that people should understand what the impacts and implications are and try to plan accordingly.

What I hear in pushback is that its unmeasurable, unusable if measured, and just following the CPI is good enough. Based on actual information, it seems that its quite measurable, quite actionable and often unrelated to the CPI.

Take C-T for example: he measured it, took actions based on his measure, although he found his results were similar to the CPI.

Were my concerns based on a knee jerk reaction based on a trip to the grocery store, I'd go along with the eye rolling "bunnys just a conspiracy theorist and doesnt believe in the cpi", but my cable and internet bills have gone up a bit ($34 and $29 a month 5 years ago, $54 and $57 today), my insurance bills have gone up about 35% even though I've gone to higher deductibles, my electricity and gas bills have risen about 20-25%, gas was $1.75 a gallon a couple of years ago and its $2.50 now after a time over $3.00...etc, etc, etc.

I'm not aware that anything I regularly purchase excepting the costco $1.50 hot dog and a drink has remained the same or gone down in price.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 08:29 PM   #77
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by Cute Fuzzy Bunny
. . . What I hear in pushback is that its unmeasurable, unusable if measured, and just following the CPI is good enough.. . .
I don't think that's a very complete and accurate portrayal of what people have been saying. Maybe we're not being clear enough. But if you have a better way to quantify inflation and include it in retirement planning, I'm interested.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 08:50 PM   #78
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Re: Official ER Forum January Inflation Report

We thought a lot about our personal cost of living when I was making up my mind whether to fully retire or not. I know that we are not the typical consumer and likely we would have expenses increase faster than the CPI-U. I too have noticed the increases in costs for communications, Greg has really seen it for food, and of course there is fuel, which has been so volatile of late. My very first post on this forum from about 3 years ago expressed my concern about cost of healthcare and other services. Heathcare costs have been increasing many times the rate of inflation, as high as 11% some years. If the costs continue to increase at the same level for the next 20 years, a good number of people on this board will be broke. I decided to retire anyway. But, given that we run risk of large increasing medical costs do to personal medical conditions we will be using a rough budget that anticipates about a 3% withdrawal rate, and even that budget has discretionary items that can be taken away (rv trips, etc).


Here is an estimate from the fed of inflation for the elderly at 3.3%: http://www.chicagofed.org/news_room/..._inflation.cfm

Here is some dry reading on healthcare cost trends from the BLS: http://www.bls.gov/opub/mlr/2004/11/art5exc.htm
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 08:55 PM   #79
 
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Re: Official ER Forum January Inflation Report

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Originally Posted by Martha
If the costs continue to increase at the same level for the next 20 years, a good number of people on this board will be broke.
When healthcare costs exceed 20% of my budget, I'll self insure. - No way I'd let health care insurance run me into the poor house.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 09:16 PM   #80
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Re: Official ER Forum January Inflation Report

Health care costs are a real drag, so you want an investment that can keep pace. When I first started an IRA in 1980-something, I figured health care would be the biggie for retirement.

My Vanguard Health Care fund has consistently outperformed the market for the last 20+ years.
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